Monday, 8 September 2014

Reading Dreze and Sen: 4 – Why has India's economic growth only barely benefited its poor?

India’s growth has caused tremendous excitement. The living standards of the middle classes (top 20% of the population by income –or, in other words- people like you and me) have improved greatly. But the story is more complex for many others such as the riksha-wala, the domestic worker or the brick-kiln labourer. Dreze and Sen argue that India’s economic growth has barely altered their abysmal living conditions.

For example, between 1993-4 and 2009-10, the average per capita rural expenditure (average expenditure of a rural person) increased at the very very low rate of 1% per year (and even for urban areas the figure was only 2% per year). There has been a slowdown of real agricultural wages in the post-reform period[1]. The growth of real wages for other parts of the economy has also been relatively slow, especially for casual or so-called ‘unskilled’ workers. The contrast to China is striking - real wages in manufacturing in China grew at 12% per-year (!!) from 2001-10, compared with 2.5% per year in India. 

The rate of poverty decline in India has been much slower than in other developing countries as a whole in the last 20 years, despite economic growth being much faster in India. 

But why has economic growth in India led to such a small increase in the wages and incomes of the poor?

One important reason is India’s economics is propelling a ‘jobless growth’ i.e. a failure to generate employment. In India, the rapid economic growth in the last 20 years has been driven by ‘services’. And a large part of the growth in services has been heavily concentrated in skill-intensive sectors (like software development, financial services and other specialized work) rather than in the labour-intensive sectors.  This has enabled the more educated section of the workforce to earn much higher wages and salaries. But the bulk of our workforce is not  involved in services, but is instead engaged in agriculture or other sectors (this includes the ‘informal sector’ which employs 90% of our labour force). Here, wages and productivity are very low.

Dreze and Sen state that India’s lack of progress in education and healthcare also prevents people from entering and flourishing in general manufacturing jobs. The progress of living standards is extremely slow (living standards include longevity, health security, literacy, educational opportunities, child undernourishment, social status etc). For example, India has a higher proportion of undernourished children than almost any other country in the world, even after 30 years of rapid economic growth. Many countries have made huge improvements in health and nutrition status of their respective populations in a shorter time, even with lower rates of economic growth (The following blogs will say more about this).

The authors argue that for economic development to take place, India needs not just growth-friendly institutions that encourage initiative but it also needs to give a central role to education which is critical to the formation of knowledge and skills (which, in turn, is essential for the process of socio-economic development).  In short, Dreze and Sen stress that it’s essential for India to focus on developing ‘human capital’ because this is crucial for growth and development.  

[The purpose of the ‘Reading Dreze and Sen’ series of blogs is to briefly summarise some of the arguments given by Jean Dreze and Amartya Sen in their book ‘An Uncertain Glory: India and its Contradictions’. The arguments are of the authors alone and the blogs are merely a recapitulation of them in as simple a way possible (the style is deliberately informal). The aim is to help myself to remember the details of these arguments (writing always helps!) but more importantly to hopefully trigger conversation and provoke contestation regarding the issues raised, even if on small forums like facebook :)]

[1] This picked up after the introduction of MREGA in 2006. 

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